Costly Data Go Untapped

Thousands of smaller public companies for the first time this year will join their larger peers in applying electronic data tags to their annual reports, under a Securities and Exchange Commission program begun in 2009. There is just one problem: Investors aren’t likely to bother looking at the information.

Since the SEC began phasing in a requirement to use eXtensible Business Reporting Language, companies have spent billions of dollars lacing their electronically filed financial statements with computer code that is meant to allow investors to easily extract financial details for analysis. But the program has failed to live up to its promise.

New research from Columbia University shows that fewer than 10% of investors have used XBRL data for analysis, amid complaints that the data isn’t reliable or timely.

In theory, the tags allow an investor with the right software to dive into a database of SEC filings and pluck out profit, revenue or other data to compare a company’s performance with others in its industry, without having to retype any figures.

When the SEC mandated XBRL under former Chairman Christopher Cox, it was touted as a tool that would help investors and analysts study more companies at a faster rate. But XBRL lost its priority status at the SEC amid the financial crisis and its aftermath. And investor interest never materialized.

A major problem is that while the tags are standardized, companies often modify them in ways that they believe better represent their business. That distorts comparisons for investors. Companies also have lost patience with a tagging process that they say is costly, creates bottlenecks in financial reporting and brings little to their businesses.

“It’s not something we believe has a lot of value internally,” said Stephen Zarrilli, chief executive at biotech holding company Safeguard Scientifics, Inc. He said his company outsources XBRL production for less than $100,000 a year and expects to continue doing so.

The Columbia study showed that many investors have heard of XBRL, but none has tried to access the data on corporate websites for investment research, and none was using it for research on a continuing basis

“This isn’t what we wanted,” said Trevor Harris, a professor at Columbia Business School and former head of the global valuation team at Morgan Stanley. “Investors have tried to use [XBRL] and would like to use it, but at what cost and what level of effort? ” he said.

It is a classic chicken-and-egg problem, Mr. Harris said. If companies don’t see value in incorporating XBRL into their financial reporting process, then the product created may not be good enough to impress investors.

“If companies don’t deliver something of high quality, why should investors use it?” he said.

The SEC said XBRL remains a powerful research tool, will evolve and that the agency is interested in improving it where possible. But even some former XBRL evangelists now say they are no longer believers.

“XBRL was the standard of tomorrow in 1999,” said Daniel Roberts, who served from 2005 to 2006 as chairman of the XBRL-US steering committee, a nonprofit group of companies formed to facilitate the adoption of the technology. “Now it simply adds to the cost burden of financial reporting,” he said.

Messrs. Harris and Roberts said XBRL could be more useful if the data was audited to improve quality, and if companies were required to provide the information more quickly, such as when earnings were released, rather than in after-the-fact quarterly filings and annual reports.

The cost of XBRL filings ranges from as little as $25,000 at some companies to as much as $500,000, according to the SEC and Financial Executives International, an organization for corporate controllers and chief financial officers. And liability protections on XBRL have expired for most companies, making them more concerned about filing mistakes.

Like Safeguard Scientifics, many companies choose to pay someone else to handle the process. About 80% of companies expect to outsource some or all of their XBRL compliance this year, according to an October survey by the Financial Executives Research Foundation.

The SEC has reached its final phase of the XBRL rollout, with small companies now required to file tagged annual reports over the next three months. As a result, the agency is “very interested” in exploring ways to make the process more efficient, such as allowing companies to embed XBRL filings in their standard annual reports, rather than submitting additional filings, said Virginia Meany, assistant director at the SEC’s Office of Risk Assessment and Interactive Data.

Since late 2011, FEI has been asking the agency to reconsider the costs and benefits of XBRL, suggesting that regulators require companies to tag fewer items. But while the SEC says it is constantly looking at ways to improve the system, it hasn’t undertaken a formal project to do so.

As it stands, tagging is a time consuming and complicated process. The number of XBRL data-tag restatements since the SEC began requiring XBRL was about 1,250 through June 30, 2012, according to data provider Baseline Insights.

Companies also have resisted embracing the XBRL system because they have invested significantly in other technologies that they believe provide superior data, though they typically don’t share those technologies with investors.

The system’s defenders say that companies and investors are merely experiencing a longer-than-expected XBRL teething process.

“Nobody has seen any revenue from analyzing XBRL data yet,” said Emily Huang, co-founder of Rivet Software, which processes XBRL filings for companies. “But there was no historical data to be consumed.”

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